Imperfect Financial Markets and Investment Inefficiencies

Abstract

We analyze the consequences of noisy information aggregation for investment. Market imperfections create endogenous rents that cause overinvestment in up-side risks and underinvestment in downside risks. In partial equilibrium, these inefficiencies are particularly severe if upside risks are coupled with easy scalabil-ity of investment. In general equilibrium, the shareholders’ collective attempts to boost value of individual firms leads to a novel externality operating through price that amplifies investment distortions with downside risks but offsets dis-tortions with upside risks.

Replaced by

Elias Albagli, Christian Hellwig, and Aleh Tsyvinski, “Imperfect Financial Markets and Investment Inefficiencies”, American Economic Review, vol. 113, n. 9, September 2023, pp. 2323–2354.

Reference

Elias Albagli, Christian Hellwig, and Aleh Tsyvinski, “Imperfect Financial Markets and Investment Inefficiencies”, TSE Working Paper, n. 18-891, February 2018, revised February 2023.